INNOVATION ECOSYSTEM PERSPECTIVES ON FINANCIAL SERVICES INNOVATION
Acta Universitatis Lappeenrantaensis 669
Thesis for the degree of Doctor of Science (Technology) to be presented with due permission for public examination and criticism in Auditorium 1382, Skinnarilankatu 34, at the Lappeenranta University of Technology, Lappeenranta, Finland on the 8th of December, 2015, at noon.
Co-supervisor Professor Anne‐Laure Mention
Luxembourg Institute of Science and Technology (LIST) Grand Duchy of Luxembourg
University of Liège (ULg) Belgium
Reviewers Professor Tor Helge Aas University of Agder (UiA) Norway
Professor Maria Antikainen
VTT Technical Research Centre of Finland Tampere University of Technology (TUT) Finland
Opponent Professor Carl Kock Instituto de Empresa (IE) Spain
ISBN 978-952-265-871-5 ISBN 978-952-265-872-2 (PDF)
ISSN-L 1456-4491 ISSN 1456-4491
Lappeenrannan teknillinen yliopisto Yliopistopaino 2015
Dieter De Smet
Innovation Ecosystem Perspectives on Financial Services Innovation Lappeenranta 2015
149 pages
Acta Universitatis Lappeenrantaensis 669 Diss. Lappeenranta University of Technology
ISBN 978-952-265-871-5, ISBN 978-952-265-872-2 (PDF), ISSN-L 1456- 4491, ISSN 1456-4491
The context of financial services has been characterised by changes in the regulatory, technological and societal landscape. Consumers are increasingly interested in mobile payments, crowdfunding and microfinance services, either for themselves or because collaborative consumption is viewed as a more sustainable. Retail branches are re-organised to further meet the expectations of customers, start-ups focusing on technology for financial services (i.e. Fintech) are ever growing and financial services companies reinforce their own innovation practices (e.g. creation of innovation labs or venture capital investment funds).
The innovation ecosystem around financial services companies represents the many actors with whom they can co-create and co-produce innovative new services for their customers (or for themselves). The innovation process is no longer a closed internal effort but needs to include external actors from the innovation ecosystem. This topic is especially interesting in a small and open economy where the financial centre takes a prominent place in the economy.
The research question is therefore “How does the innovation ecosystem influence the innovation process within financial services companies?”.
The influence of the innovation ecosystem on the innovation process within financial service companies mainly comes from its social capital and value creation efforts. However learning to work and exchange in an innovation ecosystem is also expected to influence the innovation process in place.
Realizing the potential of the innovation ecosystem requires sufficient capabilities to manage new information coming from the innovation ecosystem. The professional associations provide the necessary coordination among actors in the innovation ecosystem to co-create and appropriate value, while fostering co-evolution within the innovation ecosystem.
capital; resource-based view; RBV.
I genuinely thank the following people who supported me during the preparation, realization and finalization of my doctoral dissertation. Every one of you made it possible for me to complete it and benefit from its unique (sometimes unexpected) experiences.
Marko Torkkeli for accepting to be my supervisor, providing me with various, memorable experiences surrounding Finnish culture and anecdotes around the theme “Research - Life as it is”.
Anne-Laure Mention for accepting to be my co-supervisor and regularly supporting and advising me along the entire dissertation process.
Tor Helge Aas and Maria Antikainen for accepting to be the preliminary examiners, for providing their detailed remarks and suggestions that helped increase the incisiveness of the dissertation.
Carl Kock for accepting to be the opponent and for his constructive critiques.
The interviewees for their time and willingness to participate, this research would not have been possible without their cooperation.
The delegates at the conferences for their feedback and remarks.
Dimitrios Salampasis, Clémentine Fry, Anna-Leena Asikainen and Andrey Martovoy for their support in various ways, degrees and contents.
Kim Hublé and Tina Darby for reading an initial draft of this dissertation and providing feedback regarding its readability.
Dieter G.S. De Smet 20th of November 2015 Luxembourg
To my wife Sylvia and my parents
for their love, curiosity and encouragement
during my dissertation experience.
“Perfer et obdura, dolor hic tibi proderit olim“
LIST OF PUBLICATIONS ... 11
LIST OF FIGURES ... 13
LIST OF TABLES ... 15
LIST OF ABBREVIATIONS ... 17
PART I: OVERVIEW OF THE DISSERTATION ... 19
1. INTRODUCTION ... 21
1.1 RESEARCH CONTEXT AND MOTIVATIONS ... 21
1.1.1 International attention to innovation... 21
1.1.2 Importance of innovation from a sector perspective ... 22
1.1.3 Importance of innovation from a company perspective ... 22
1.1.4 The services economy and financial services ... 23
1.1.5 Innovation ecosystems and financial services ... 25
1.2 IDENTIFICATION OF THE KNOWLEDGE GAPS ... 27
1.2.1 Preferred actors in the innovation ecosystem ... 29
1.2.2 Organisational capabilities ... 30
1.2.3 Social capital ... 31
1.2.4 Value creation ... 32
2. STATE OF THE ART ... 37
2.1 SERVICE INNOVATION RESEARCH ... 37
2.1.1 Schools of thought ... 39
2.1.2 The innovation process ... 41
2.1.3 Financial services innovation ... 43
2.2 THE INNOVATION ECOSYSTEM ... 47
2.3 THE RESOURCE-BASED VIEW OF THE FIRM (RBV) ... 50
2.3.1 Assumptions and expected outcomes ... 52
2.3.2 Critiques and limitations ... 55
2.3.3 Complementarities with other theories ... 57
2.4 ORGANISATIONAL CAPABILITIES ... 59
2.4.1 Theoretical link with the RBV ... 61
2.4.2 Absorptive capacity (1st order capability) ... 62
2.4.3 Organisational learning (2nd order capability) ... 62
2.5 SOCIAL CAPITAL... 64
2.5.1 Theoretical link with the RBV ... 66
2.6.1 Theoretical link with the RBV ... 70
2.6.2 Service-Dominant Logic (Customer as co-creator) ... 71
2.6.3 New Service Development (Customer as co-producer) ... 72
3. RESEARCH DESIGN ... 75
3.1 PARADIGM... 75
3.2 REASONING ... 78
3.3 METHODOLOGY ... 81
3.3.1 Disciplinary approach ... 81
3.3.2 Research methods ... 82
3.4 THE EMPIRICAL SETTING AND ITS FEATURES ... 85
3.5 ASSESSING RESEARCH QUALITY ... 87
4. SUMMARY OF PUBLICATIONS ... 93
4.1 CONTRIBUTIONS TO THE RESEARCH QUESTION ... 95
4.2 CONTRIBUTIONS TO THE SUB-RESEARCH QUESTIONS ... 99
4.3 PUBLICATION 1 ... 101
4.4 PUBLICATION 2 ... 102
4.5 PUBLICATION 3 ... 104
4.6 PUBLICATION 4 ... 105
4.7 PUBLICATION 5 ... 107
5. CONCLUSION ... 109
5.1 DISCUSSION OF THE MAIN FINDINGS ... 109
5.2 THEORETICAL IMPLICATIONS ... 113
5.3 MANAGERIAL IMPLICATIONS ... 115
5.4 POLICY IMPLICATIONS ... 116
5.5 EVALUATION OF THE DISSERTATION’S RESEARCH QUALITY ... 118
5.6 PERSPECTIVES FOR FURTHER RESEARCH ... 120
REFERENCES ... 121
PART II: PUBLICATIONS ... 151
This dissertation is based on the following publications. The rights have been granted by publishers to include the publications in dissertation.
I. De Smet, D., Mention, A.-L. and Torkkeli, M. (2015). The sources of innovation in Luxembourg financial services providers. Service Business. Submitted for publication.
II. De Smet, D., Mention, A.-L. and Torkkeli, M. (2016). Knowledge sourcing from customers in new financial service development.
International Journal of Technology Marketing. In press.
III. De Smet, D., Mention, A.-L. and Torkkeli, M. (2015). Alliances in the financial services sector - Exploring its organisational learning mechanisms. International Journal of Business Excellence. 8 (4), pp.
458-470. doi: 10.1504/IJBEX.2015.070315
IV. De Smet, D. (2012). Exploring the influence of regulation on the innovation process. International Journal of Entrepreneurship and Innovation Management. 16 (1/2), pp. 73-97. doi:
10.1504/IJEIM.2012.050444
V. De Smet, D., Mention, A.-L. and Torkkeli, M. (2014). Co-creating new financial services: Absorbing innovation-related knowledge from customers. Academy of Management Annual Meeting Proceedings.
Philadelphia: Academy of Management. doi:
10.5465/AMBPP.2014.13590abstract
Author's contribution
Dieter De Smet is the principal author and investigator in all the publications.
Anne-Laure-Mention and Marko Torkkeli provided feedback along the research process, commented on the research results and contributed to the formulation of their implications.
Figure 1: Financial services innovation ecosystem ... 26
Figure 2: Drivers of the dynamics in an innovation ecosystem ... 49
Figure 3: RBV as a pivotal theory for the innovation ecosystem ... 51
Figure 4: Conceptual Framework of the dissertation ... 52
Figure 5: Origination of the publications ... 95
Table 1: Research (sub-)question(s) and contributions from publications ... 33
Table 2: Sub-research questions, Conceptual Framework and publications .. 35
Table 3: Constructivist paradigm (Guba and Lincoln, 1994) ... 78
Table 4: Evaluating research results in a constructivist paradigm ... 88
Table 5: Warranting the trustworthiness of the obtained results ... 90
Table 6: Conceptual Framework and contributions from publications ... 93
Table 7: Contributions from publications to the main research question ... 96
Table 8: Contributions from publications to the sub-research questions ... 99
CSSF Commission de Surveillance du Secteur Financier (Luxembourg Financial Services Regulator) EBA European Banking Authority
ECB European Central Bank
EIOPA European Insurance and Occupational Pensions Authority ESA European Supervisory Authorities
ESFS European System of Financial Supervision ESMA European Securities and Markets Authority ESRB European Systemic Risk board
EU European Union
FP Foundational Premises
G-D Goods-Dominant
GDP Gross Domestic Product HNWI High-Net-Worth Individuals KBV Knowledge-Based View of the firm LFF Luxembourg For Finance
NPD New Product Development
NRBV Natural-Resource-Based View of the firm NSD New Service Development
OECD Organization for Economic Co-operation and Development QCA Qualitative Comparative Analysis
R&D Research and Development
RBT Resource-Based Theory of the firm RBV Resource-Based View of the firm
RMB Renminbi Yuan
RQ Research Question
S-D Service-Dominant
SME Small and Medium-sized Enterprise SRQ Sub-Research Question
UCITS Undertakings for Collective Investment in Transferable Securities
UN United Nations
UNCTAD United Nations Conference on Trade and Development VRIN Valuable, Rare, Inimitable and Nonsubstitutable
1. Introduction
This section of the dissertation will describe the research context and the motivation for engaging the chosen research topic: Innovation management within financial services companies. The overall knowledge gaps will be discussed to build up the research question and sub-questions of the dissertation. A more detailed discussion of the central concepts and service research stream will be made in section 2 of the dissertation.
1.1 Research context and motivations
The setting of the research topic will be introduced by taking a top down view, moving from the international level to the sectoral level and finally to the company level itself. More attention will also be paid to the importance of services in developed economies and financial services in particular.
Furthermore the relevance of the innovation ecosystem perspective for financial services innovation will be discussed. The particularities of the empirical setting, an open and small economy (i.e. Grand Duchy of Luxembourg), will be discussed in section 3.
1.1.1 International attention to innovation
Innovation is recognized as one of the main policy objectives within the European Union since it is considered to be the central driver of the economic growth in Member States’ economies. The outcomes of innovation are not solely economic and isolated at the level of a company (e.g. increased competitiveness, enhanced productivity or creating new jobs) but also include societal benefits such as dealing with the impacts of global warming through greener transportation and smarter urban areas. Therefore innovation is included in the Europe 2020 strategy which aims to create sustainable and inclusive growth among the Member States. This strategy has a dedicated action package, Innovation Union initiative, to boost the innovation performance of the European Union as a whole, and reinforce the realization of these beneficial impacts (European Commission, 2013a). In order to implement the Innovation Union initiative, the Horizon 2020 Research and Innovation programme was recently launched. It is a financial framework considered to be the biggest research and innovation programme ever in the European Union (European Commission, 2014b). Innovation and R&D activities are hence relevant and viewed as one of the measures to get national
economies back on track and recover from the economic crisis (OECD, 2010;
European Commission, 2014b). Member States who decided to invest more, on average, in R&D and innovation before and during the crisis, have been found to be the most resilient during the economic downturn (Ciriaci et al., 2013).
1.1.2 Importance of innovation from a sector perspective
Not only policy makers are interested in innovation but the various economic sectors and the individual companies operating within it pay particular attention to innovation. The set of policies, skills, professions and other measures aimed at supporting innovation within a country, often referred to as the national innovation system (OECD, 1997), are important for realizing the systemic nature of innovation (Edquist, 2005) itself and reaps the benefits of increased competitiveness and growth. This innovation system is also present in specific sectors of economic activity and is relevant since sectors evolve over time, through learning, creating new businesses and generators of national wealth and employment (Malerba, 2002). The diversity of companies within a given sector of the economy is considered as one of the driving factors of innovation for the national economy (Metcalfe, 2006). These differences can be attributable to the sets of resources and decision rules that companies use and their subsequent adaptation to meet competitive pressures (Woerter, 2009). Research produces various possible classifications of sectors (Pavitt, 1984; Tidd et al., 2005; Greenhalgh and Rogers, 2006) which aim at improving understanding the organisation of innovation activities and the possible structural characteristics of innovation that differentiate between sectors. Due to the focus on sectorial classifications, the individual company is not always sufficiently considered. Yet this level of analysis explains differences in sectorial innovation performance due to the individual strategies of companies towards innovation (de Jong and Marsili, 2006).
1.1.3 Importance of innovation from a company perspective
Innovation is described as the driver for companies’ growth, allowing them to prosper and sustain their profitability (Drucker, 1985). Therefore innovation is paramount for increasing the competitive advantage of the company (Porter, 1985), its business performance and productivity (Tidd, 2001; Cainelli et al., 2006). Innovation is strategically important because it needs to create value for the customer through its set of resources and partnerships, often referred to as its business model. (Chesbrough, 2010; Teece, 2010). This requires more
collaboration with partners that are external to the company, rather than focusing solely on internal efforts to produce new products or services (Laursen and Salter, 2014). However the correct resources and their configuration into capabilities are necessary (Teece, 1996), for example it requires an alliance building capability to engage with external partners for innovation or the capability to acquire and assimilate information from external sources (Cohen and Levinthal, 1990). Companies can choose to organise their innovation activities by using a (dedicated) process to create new products or services (de Brentani, 1991; Cooper and Kleinschmidt, 1995;
de Brentani and Ragot, 1996). These elements are not sufficient for realizing innovation, strategic choices and initiatives also need to be taken if a company hopes to capture competitive advantage from its innovation activities (DeSarbo et al., 2006). Hence innovation management is a key element of a company’s strategy (Keupp et al., 2012) and companies that do not innovate will eventually disappear from the market (Tidd and Bessant, 2011).
1.1.4 The services economy and financial services
Overall the structure of the economy has been changing, moving from more product oriented industries (often referred to as manufacturing) to more service oriented industries. This trend has been observed for quite a while and especially in knowledge intensive businesses, such as financial services (Schricke et al., 2012). The importance of manufacturing has been falling back to less than 20% GDP in certain OECD economies whilst the contribution of services has been increasing to more than 70% GDP.
Therefore it is arguable that services are occupying a central and leading role in more developed economies (OECD, 2000). In 2010 it was found that the services sector represented about 2/3 of the global gross domestic product and around 39% of global employment. The economies with the largest share of employment in services were also found to be the wealthiest (UNCTAD, 2014). The economic crisis and globalization have further stimulated the importance of investing in service based R&D and innovation activities (OECD, 2012).
The service economy was also found to be prominent in most EU Member States, since it accounts for almost 2/3 of total value added, almost 80% of the real value added growth (in the decade to 2005) and for as much as ¾ of the inter-country differences in economic growth among Member States.
Additionally the services sector’s employment growth generally exceeds the manufacturing sectors’ growth (Uppenberg and Strauss, 2010). Financial
services are a pillar element of the economy’s infrastructure since it contributes to output growth and ultimately a country’s development. This type of service facilitates an efficient resource allocation, facilitates the exchange of goods and other services, fosters better capital allocations by producing ex ante information and increases investors’ willingness to finance new projects (UNCTAD, 2014).
Within the services industry, particular attention will go to the financial services sector because of its central role in the economy and its contributions to businesses, public organisations and consumers. The importance of this sector in the overall economy is undeniable and well documented (Levine, 2005). Financial services permit a flow of assets for investments (e.g. in start- ups, in established companies, in thematic projects supporting social or environmental objectives) made available by collecting these assets through savings or direct investment. It facilitates the exchange of goods and services through the payments it accommodates (Merton, 1995). These functions create the necessary conduit for economic growth and development (World Economic Forum, 2013).
However the financial services industry has undergone turbulences due to the 2007-2008 subprime crisis, associated with the most severe shock in post-war economic history (European Commission, 2009). The subsequent waves of consolidation in this sector in the years before the crisis (also referred to as financial integration, universal banking or bancassurance) created large providers of financial services covering almost any customer need, going from savings and investments to loans and insurances. These mergers, acquisitions or consolidations are inspired by the realization of economies of scope and scale, leading to operational efficiencies through product and process innovations. On the other hand this integration can also create coordination issues due to an increased complexity of its operations, different risk management practices and possibly the emergence of conflicts of interest (Skipper, 2001). These coordination risks and opaqueness were also elements that aggravated the most recent financial crisis, coupled with an increased interconnectivity of national economies (i.e. globalization) resulted in an economic slump, which has still not fully recovered in several countries. The
“too big to fail” financial institutions were confronted with substantial public support to mitigate their impacts on society. This also stimulated the establishment of new financial regulations and especially enhanced supervision of this sector to reinforce the trust that society has in financial services (World Economic Forum, 2013). In the wake of these turbulences
and because the financial services sector is so important in our economy, financial education, consumer protection and sustainability objectives have also been more emphasised (Grifoni and Messy, 2012; Lewis and Messy, 2012).
As another consequence, new regulatory initiatives are taken in nearly all affected countries and on a European level, the European System of Financial Supervision (ESFS) was created. It comprises three European Supervisory Authorities (ESA), the European banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), and the European Systemic Risk board (ESRB) were established in 2011 (European Commission, 2014c).
These initiatives are complementary with the elaboration of the Banking Union for members of the Eurozone, to have a unified rule book, supervisory mechanisms from the European Central Bank (ECB) and a bail out mechanism for failing banks (European Commission, 2014a).
1.1.5 Innovation ecosystems and financial services
The business environment is being altered by our society, entering a digitized era where ideas and insights are abundant, more easily accessible (e.g.
through crowds, contests, communities and collaborators) and hence serving as (potential) co-creators of new services. There is an increasing acceptance in society that sustainability is important, that its implications for business models and services offers to society need to be considered more (Stead and Stead, 2013). This change in the expectation pattern of the company’s stakeholders enhances the attention to collaborative consumption such as crowdfunding, carsharing or peer-to-peer lending. This is especially the case for the services industries where technology is an omnipresent catalyst for producing and delivering the service itself (Belk, 2014).
These two trends coalescence into the notion of the “sharing economy”, where underutilized resources are offered and shared between stakeholders at a large scale, co-creating an innovative service which offers monetary and non- monetary benefits to all the stakeholders (Botsman and Rogers, 2010). This co-creation is made possible by the overall increased connectivity between the stakeholders, facilitating the combination of different sets of resources.
Therefore these services can offer a solution that ultimately addresses societal challenges in an economy, which is increasingly being characterised by commoditization and de-monetization.
The fact that stakeholders (consisting of several communities of actors) need to collaborate to co-create new services that meet ever increasing customer expectations, while sharing parts of the benefits of this new service and competing with each other on other areas, is a typical characteristic of an innovation ecosystem (Moore, 1993; Moore, 1996; Moore, 2006; Autio and Thomas, 2014). A representation of the innovation ecosystem for financial services can be found in Figure 1.
Figure 1: Financial services innovation ecosystem
The stakeholders in an innovation ecosystem are bound to each other by common interests and values (e.g. entrepreneurship, city logistics or food safety). This allows them to co-create innovative combinations of resources, beyond the individual scope and abilities of a single community, to address larger societal problems or answer unmet customer needs (or expectations).
However the symbiotic relationships and dynamics in an innovation ecosystem require a central hub (e.g. a focal actor or a platform) that coordinates the value creation and sharing. The increased attention to
Regulators
European Union
OECD
National FATF UN
Technology
transfer Research Education
Incubators
Professional associations
Service providers
Innovation Labs
Corporate and Institutional
Venture Capital Business
Angels
The crowd Governmental NGO
Financing Academic
Business
Organized civil society
Customer
Retail banking
Private banking
Commercial banking Financial Services Innovation Ecosystem
innovation as the engine of future growth and jobs, leads to the interest for start-ups and entrepreneurs that devise new (financial) services and solutions that can generate the needed innovation. Therefore ecosystems should leverage start-up companies, in a given region, to foster job growth and economic development (Startup Europe Partnership, 2014). This element can also be linked to the exponential growth of funding possibilities for start-ups that develop new technologies for financial services, labelled Fintech (The Economist, 2015).
Turbulences and waves of change in companies, mostly originating from the external environment, encourages evolutions in its organisation for innovation (Volberda et al., 2014). These make them more effective/efficient in their innovation ecosystem and this is also the case for financial services companies (Flier et al., 2001; Flier et al., 2003).
Within financial services companies, several areas can be identified where innovation is expected to bring significant benefits in the coming years. A comprehensive overview can be found in a report (World Economic Forum, 2015) where changes in societal perceptions and technological possibilities will challenge the current value chains for financial services: Emerging Payment Rails, Cashless World, Smarter, Faster Machines, New Market Platforms, Process Externalisation, Empowered Investors, Crowdfunding, Alternative Lending, Shifting Customer Preferences, Insurance Disaggregation, Connected Insurance. Each of these areas is believed to be pushing innovative ideas and the co-creation of new services, through the collaboration between the actors in the financial service innovation ecosystem.
1.2 Identification of the knowledge gaps
Collaboration for innovation implies multiple interactions with other companies and their employees, because the focus of search for innovation is moving from a more isolated (internal) focus towards a more open (external) focus on the innovation ecosystem (Iansiti and Levien, 2004). In essence, the innovation ecosystem refers to the interconnected actors surrounding an individual company, where these actors are coordinated for engaging in collaborative activities to ultimately generate innovation. A more detailed discussion on the concept of the innovation ecosystem can be found in section 2.2 of this dissertation.
Companies could also choose to compete with their peers by imitating their strategic choices (e.g. innovation management and its organisation) instead of making collaborative arrangements. However they are often confronted with difficulties on actually deciding to imitate, because it will also have its consequences regarding the actual realization of the anticipated benefits (Ordanini et al., 2008). Companies bundle resources (i.e. into a configuration that can be deployed) to create capabilities for increased or sustained competitive advantage (Amit and Schoemaker, 1993; Sirmon et al., 2007) which are routinized internally. This can create complementarity issues when this resource configuration needs to be adapted (Black and Boal, 1994). On the other hand these organisational routines (Nelson and Winter, 1982; Dosi, 1988; Zollo and Winter, 2002) will also make it harder to fully understand the implications of the choices to be made regarding resource reconfigurations and their implementation. The resource configurations in place at other companies are the result of their resource accumulation and historical particularities (Dierickx and Cool, 1989), which are path-dependent and company specific (Barney, 1991). The choice to imitate its competitors is not something straightforward, hence the necessity to jointly consider collaborative arrangements along the innovation process and its management.
Management research on innovation ecosystems is considered to be limited, with several questions remaining. It is considered that the implications for managing innovation in such as setting (e.g. directing and leveraging the collaboration in the innovation ecosystem) are in need of more research, coupled with practical implications for strategic management (Autio and Thomas, 2014). In particular insights on the coordination of the innovation ecosystem (Ritter et al., 2004), the distinctive influences of direct and indirect ties depending on the position in the innovation ecosystem (Adner and Kapoor, 2010), and the creation/appropriation of value in the innovation ecosystem (Autio and Thomas, 2014) needs more attention. Besides the limited amount of management research on the innovation ecosystem itself, the attention to financial services innovation is also limited despite its importance in the service economy (Mention and Torkkeli, 2012). A more detailed discussion on this underresearched area can be found in section 2.1.3 of this dissertation.
Innovation is a complex process in itself, which is directed by multiple stakeholders in it the innovation ecosystem. This multifaceted innovation process can be researched by taking an innovation ecosystem perspective because it is composed of three interrelated domains (organisational
capabilities, social capital and value creation) that can synthesise the innovation process in a company. This brings up the main research question of this dissertation:
How does the innovation ecosystem influence the innovation process within financial services companies?
1.2.1 Preferred actors in the innovation ecosystem
The innovation ecosystem for financial service companies has not yet been researched, similarly to the scarcity of ecosystem research in general. This offers an opportunity from a strategic management research perspective. In this dissertation it will be a smaller and open economy, with a significant international status for its financial service sector, the Grand Duchy of Luxembourg (more details can be found in section 3.4 of the dissertation).
Within an innovation ecosystem, the interconnected actors are one of the central research objects. Financial services can be classified as knowledge intensive business services (Schricke et al., 2012) and they were reported to be intensive users of external information from various sources to leverage the internal innovation process (Hollenstein, 2003; Weigelt and Sarkar, 2009;
Oliveira and von Hippel, 2011; West and Bogers, 2014). Financial services companies will have to solve various organisational and technological hurdles in order to implement innovation (Ettlie and Reza, 1992). Inter-company cooperation can provide companies with information and resources that otherwise would have been difficult to obtain (Ahuja, 2000a). Cooperation with technology consultants is a possible solution to deal with the organisational and technological hurdles when implementing innovation (Weigelt and Sarkar, 2009) whilst cooperating with other financial services providers might be less appealing (Jacobsen and Tschoegl, 1999). Past research focused on the cooperation within the Luxembourg services sector (Mention, 2011) and hinted at the positive influence from customers and suppliers on the innovation novelty in the Luxembourg financial services sector. Professional associations are reported to be influential for adopting new regulations and facilitating relationships between their members (Deephouse, 1999; Greenwood et al., 2002), whilst the interactions between the government and these professional associations are in need of more research (Vermeulen et al., 2007a). Within the context of this dissertation, a first objective was to explore the use of these external and internal sources of information for innovation within the Luxembourg financial service
innovation ecosystem. The second objective was to determine which actors in the Luxembourg innovation ecosystem tend to be favoured partners for collaboration.
Therefore the first sub-research question of the dissertation is formulated as:
Which actors of the innovation ecosystem are preferably engaged for collaborative activities?
1.2.2 Organisational capabilities
Choosing to collaborate with other companies and actors in the innovation ecosystem also implies the need to have sufficient capabilities to effectively do so (Möller and Svahn, 2003; Ritter et al., 2004; Möller and Svahn, 2009).
This requires for example the capability to absorb and use external information and know-how, known as absorptive capacity (Cohen and Levinthal, 1990; Zahra and George, 2002; Todorova and Durisin, 2007).
Another capability that is essential refers to the creation of strategic alliances (Gulati, 1999; Das and Teng, 2000; Hagedoorn, 2002; Christoffersen, 2013) with other corporate or public actors in the innovation ecosystem. The possible contribution of absorptive capacity when dealing with actors from the innovation ecosystem is however unexplored and the importance of dynamic capabilities should also be relevant because these act as sensors for innovation opportunities (Teece, 2007). Regarding the latter, the possible contributions of organizational learning, closely linked to absorptive capacity mechanisms (Lipshitz et al., 2002; Knoppen et al., 2011), can also bring new insights for financial services and innovation ecosystem research because it improves the innovation performance during collaboration (Lin et al., 2012). Information technology is very important for, and historically omnipresent in, financial services (Chiasson and Davidson, 2005). Developing and absorbing technology has been reported as one of the benefits from collaboration (Ahuja, 2000b) with another company from the innovation ecosystem.
Therefore the second sub-research question of the dissertation is formulated as:
How do actors in the innovation ecosystem oversee their collaborative activities (i.e. inbound and outbound)?
1.2.3 Social capital
Intercompany collaboration is essential for innovation to emerge in the services industries, ignoring this exchange will actually limit the knowledge base for innovation (Pittaway et al., 2004) because leveraging these collaborative relationships is in itself a strategic resource for innovation (Dyer and Singh, 1998; Chisholm and Nielsen, 2009; Huggins, 2010). Inter-personal (Granovetter, 1985) and inter-firm relationships as resources to be leveraged for innovation (Mowery et al., 1996) are important in the innovation ecosystem. Relationships and ties between companies, also at the interpersonal level (Gulati, 1999; Adler and Kwon, 2002), will be created through collaboration for accessing new information needed to develop innovation (Ahuja, 2000b; Ahuja, 2000a). Innovation is generated from the conversion of various actors’ information and social capital facilitates this conversion (Landry et al., 2002), hence some scholars regard social capital as the bedrock of innovation (Zheng, 2010). Social capital influences the company’s ability to acquire new knowledge and apply it for innovative outputs (Nahapiet and Ghoshal, 1998). More specifically, knowledge acquisition was found to mediate between social capital and the exploitation of this knowledge (Yli-Renko et al., 2001). Furthermore social capital (Nahapiet and Ghoshal, 1998; Tsai and Ghoshal, 1998) was found to be very relevant to explain the effects of these relationships and ties for collaboration, since they facilitate the flow of tacit knowledge (i.e. know how) in, and between, companies that can result in innovation (Tsai, 2001; Inkpen and Tsang, 2005). Within the strategic management literature, to which innovation certainly belongs (Keupp et al., 2012), social capital (i.e. ties and relationships) was found to explain company performance at multiple company levels (individual, team, organisational unit) and larger economic units such as communities and countries (Moran, 2005). An illustration of this, is the research finding that geographically bound social capital facilitates learning for innovation by reducing the costs of searching and exchange among actors from that same region (Laursen et al., 2012). Within the peculiar empirical context of this dissertation, it would be interesting to research if this finding can be corroborated.
The third sub-research question of the dissertation is formulated as:
How are the relationships between actors in the innovation ecosystem influencing (i.e. enhancing and constraining) collaborative activities?
1.2.4 Value creation
The internal organisation to create innovation, the implementation of one of the innovation process models (Rothwell, 1992; Rothwell, 1994), requires attention to the new service and product development process (Cooper, 1990;
de Brentani, 1991; O'Connor, 1994; Cooper and Kleinschmidt, 1995; Cooper, 1996; de Brentani and Ragot, 1996; Menor et al., 2002; de Brentani et al., 2010; Van Oorschot et al., 2010). The new service development process is an important aspects of collaboration for innovation because it is oriented towards producing value (Schleimer and Shulman, 2011). In particular for the new service developments process, the collaboration with customers to co- create was reported to be relevant for developing new service and product innovation (von Hippel, 1986; Greer and Lei, 2012; Stock, 2014; West and Bogers, 2014) and represents one of the actors in innovation ecosystems which are not always considered in other research.
Customer orientation was reported to be the main factor for achieving incremental innovations in services sectors (Cheng and Krumwiede, 2012) and insights from customers are one among the main drivers of new service developments in financial services (Pallister et al., 2007). However research found mixed results regarding the degree of customer involvement during the service development process in financial services companies (Chien and Chen, 2010). Findings regarding the propensity to involve customers are also mixed since the type of financial customer plays a role. For example cooperation with customers was found to be higher in the retail banking segment, rather than corporate markets (Oliveira and von Hippel, 2011) whilst the opposite was also reported (Athanassopoulou and Johne, 2004). This research focused on the segment of private banking which is not often considered in academic research on financial services, with some notable exceptions but that do not cover Luxembourg (Lassar et al., 2000; Maire and Collerette, 2011).
Customers are among one of the possible external sources of information for innovation and also a possible cooperation partner for the development of new services (Akamavi, 2005; Edvardsson et al., 2012; Greer and Lei, 2012;
Edvardsson et al., 2013; West and Bogers, 2014). A successful new service development also requires an absorptive capacity (Cohen and Levinthal, 1990) to comprehend information and knowledge from the customer (Lusch et al., 2007) which is also relevant in the new service development process of financial services companies (Alam, 2002; Alam and Perry, 2002; Alam,
2006; Menor and Roth, 2008; Carbonell et al., 2009). Organisational learning during the process of new financial services development plays a mediating role between company antecedents (e.g. culture, openness or organisational) and innovation performance (Blazevic and Lievens, 2004). The financial services company’s absorptive capacity (Jansen et al., 2005) is driven by organisational antecedents (Tu et al., 2006; Foss et al., 2011) but also by organisational learning mechanisms (Lipshitz et al., 2002; Naot et al., 2004;
Knoppen et al., 2011).
The fourth and final research sub-question of the dissertation is formulated as:
How do actors in the innovation ecosystem create value (i.e. downstream and upstream) during collaborative activities?
An overview of the research question of this dissertation, its related sub- research questions and the contributions from the publications to these, is made available in Table 1. The main contributing publication to each sub- research question is listed in bold. However some elements of the other publications also provided insights on the sub-research question, but they were not critical to answering this sub-research question. More discussion on the individual contributions of the publications to the main and sub-research questions is available in sections 4.1 and 4.2 further on.
Table 1: Research (sub-)question(s) and contributions from publications
Main research question (RQ)
How does the innovation ecosystem influence the innovation process within financial services companies?
Sub-research question 1 (SRQ 1)
Which actors of the innovation ecosystem are preferably engaged for collaborative activities?
Main contributor to SRQ 1 Publication 1
Complementary insights by Publication 2 Publication 4 Publication 5
Sub-research question 2 (SRQ 2)
How do actors in the innovation ecosystem oversee their collaborative activities (i.e.
inbound and outbound)?
Main contributor to SRQ 2 Publication 2
Complementary insights by Publication 3 Publication 4 Publication 5 Sub-research question 3 (SRQ 3)
How are the relationships between actors in the innovation ecosystem influencing (i.e.
enhancing and constraining) collaborative activities?
Main contributor to SRQ 3 Publication 4
Complementary insights by Publication 3 Publication 5 Sub-research question 4 (SRQ 4)
How do actors in the innovation ecosystem create value (i.e. downstream and upstream)
during collaborative activities?
Main contributor to SRQ 4 Publication 5
Complementary insights by Publication 2 Publication 3 Publication 4
The Conceptual Framework (Figure 4 on page 52), based on the three interrelated domains of an innovation ecosystem that characterise is dynamics (i.e. organisational capabilities, social capital and value creation, visualised in Figure 2 on page 49), will be elaborated upon in sections 2.3, 2.4, 2.5 and 2.6 of the dissertation. The links between the Conceptual Framework of the dissertation and the publications that contribute to the conceptual junctures of it (Table 6 on page 93), can also be traced back to the sub-research questions described above in Table 1. Their combination allows identifying the overall links between them, as shown in Table 2.
35 Table 2: Sub-research questions, Conceptual Framework and publications Sub- research question
Juncture 1Juncture 2Juncture 3Juncture 4Conceptua Framewo Absorptive Capacity Service-Dominant Logic Organisational Learning Strategic Relationships New Service Development Relational Embeddedness
Service-Dominant Logic Absorptive Capacity Strategic Relationships SRQ 1XXXPublicatio SRQ 2XXXPublicatio SRQ 3XXXPublicatio SRQ 4XXXPublicatio Publication 2Publication 3Publication 4Publication 5 Main contributi publicatio
2. State of the art
This section will elaborate extensively on the available knowledge from research on services innovation. Particular attention will be paid to past research on innovation and its management within the financial services sector, due to the topic of this dissertation. The conceptualisation of the innovation ecosystem will be discussed, leading to the conceptual model for the dissertation and opening up the path to its theoretical underpinnings, the Resource-based View of the Firm (RBV). Each factor directing the dynamics of the innovation ecosystem will be elaborated, its sub factors relevant for the dissertation and their theoretical appropriateness with the RBV will also be discussed.
2.1 Service innovation research
The success of companies, regions and even national economies is believed to be buoyed up by innovation (van der Panne et al., 2003) and hence it is widely researched in the management field. Defining the concept of innovation has received a lot of attention with mixed views on its exact typology, which is still under debate (Rowley et al., 2011)., but at an abstract level it can be described as the introduction of something new which creates value for someone (Garcia and Calantone, 2002; O'Sullivan and Dooley, 2008). This bottom-line definition of innovation needs to be made more concrete and applied, leading to categories (i.e. typologies) of innovation. The earliest attempt provides the distinction between new products, new sources of supply, new production methods, exploiting new markets, and new ways to organize business (Schumpeter, 1934). The classification has gone through several evolutions over time and the international consensus around the identification and classification of innovation within a company is now centred around the guidelines formulated in the Oslo Manual (OECD, 2005).
It proposes four different innovation types: process innovation, marketing innovation, organisational innovation and product innovation. A process innovation is the implementation of a new or significantly improved production or delivery method. The launch of new products and services usually has positive effects on the growth of a company and its employment, however the outcomes of process innovations can be ambiguous due to the realization of cost savings and other efficiencies (Fagerberg et al., 2006). A marketing innovation is the implementation of a new marketing method involving significant changes in product design, placement, product
promotion or pricing. An organisational innovation is the implementation of a new organisational method for a company’s business practices and internal organization. For example the creation of a new application that supports the capitalization of company information on its operations or customers.
Therefore organisational innovations are associated with renewing existing organisational procedures, routines and systems. Finally, product innovation is the introduction of a good that is new or significantly improved, compared to the previous product’s intended use, components and materials. This category is deemed to include services innovation since successful product and service innovation often require the use of new knowledge and technology, often inciting inter-firm interactions and intra-firm investments.
However most innovation-related collaborations between companies do not meet the anticipated results or fail along the way (Keupp et al., 2012).
It is important to mention that there is a debate on the distinctions and similarities between product and services innovation. Due to the presence of tangible elements (i.e. the “product”) in any service offer, various perceptions of “a service” exist (Sampson and Froehle, 2006; Spohrer and Maglio, 2008).
Nevertheless, the high level definition of a service can be described as paying for performance, that is experienced through an exchange where its value is coproduced by the customer and the supplier (Spohrer and Maglio, 2008).
On the one hand, the service sector is a major element of most economies and it also contributes to the overall development of a country. On the other hand, innovation is also found to be significant for realizing sustainable economic growth. Despite its acknowledged importance, research on services innovation is found to be underrepresented and underresearched (Edvardsson et al. 2013;
Ordanini and Parasuraman, 2011) compared to research on product innovation (Ettlie and Rosenthal, 2011). However there are indications that this attention for services innovation is continuously evolving and gaining maturity (Papastathopoulou and Hultink, 2012). Possible explanations for this difference can be found in the significant research attention to the industrial (manufacturing) sectors within national economies, in line with the historical importance of this sector in most countries and the transition towards a service economy. The manufacturing sector was perceived to be more innovative than the service sector because they were believed to be passive adopters of technology from other sectors or emulating innovations developed within the manufacturing sector (Pavitt, 1984; Toivonen and Tuominen, 2009). However research involving the manufacturing sector (Schroeder et al., 1989; Crepon et al., 1998; Laursen and Salter, 2006; Gunday et al., 2011; Oke, 2013) is now
experiencing the need to move forward into services (Ettlie and Rosenthal, 2012), indicating the interest of the business community to consider service research.
To some extent this shift is not unexpected since past research also found that results dealing with innovation in the manufacturing sector cannot be readily copied nor extrapolated, to service innovation contexts (Hipp and Grupp, 2005). The service innovation process is different from the product innovation process (Blindenbach-Driessen and van den Ende, 2014). First of all services are less tangible, perishable as compared to products. Secondly its delivery to the customer is interactive and often produced at the same time. The supplier can create a stock of products, to accommodate for the changes in demand, something which is often not possible for services. (Bowen and Ford, 2002).
Thirdly, a well thought-out design and integration of a dynamic production system is another critical element for service firms and service innovation.
Within service companies, it is actually the front office who will organize the back office (i.e. production), the opposite situation as in manufacturing companies (Atuahene-Gima, 1996). Lastly the presence of knowledge, tacit information, is more contingent on service innovation than product innovation (Sundbo, 1997).
2.1.1 Schools of thought
There are three schools of thought within research on service innovation and these are described by taking into account the degree of differentiation (i.e.
evolution) from innovation research in the manufacturing sector, which is considered to be product innovation research through technological adoption and usage (Gallouj and Savona, 2009).
The first one is referred to as assimilation or technologist (Gallouj, 1998) and does not make any distinction between service or product innovation since they are equivalents, having no particularities (Drejer, 2004). Service innovation should therefore be able to use the results and practices of product innovation. This school of thought especially characterizes the pioneering research on service innovation and its literature and its baseline is that innovation consists of a set of activities which are common to all sectors or types of innovation, hence no need to distinguish between service or product innovation. However it remains used in various research initiatives, more recent examples include a typology for the modes of innovation that can be distinguished by their appropriability, opportunity conditions and level of
cumulative knowledge (Peneder, 2010). Similarly the forms of innovation could be described, while leaving out the particularities of service innovation:
process innovation, business model innovation, product/service innovation (Crossan and Apaydin, 2010).
The second school of thought distinguishes between the required organisation for product innovation and service innovation, both being different, and is hence referred to as demarcation (differentiation) or service-oriented (Drejer, 2004; Gallouj and Savona, 2009). This school of thought calls for dedicated models that suits the particularities of services since they are less tangible, perishable and the required innovation activities not necessarily very structured (Griffin and Hauser, 1996; Henard and Szymanski, 2001). The aim is also to include the non-technological elements (e.g. practices and business methods) in service innovation (Evangelista, 2006), as opposed to the assimilation (technologist) discipline. Most of the research done on service innovation contributes to this discipline (Sundbo, 1997; Oke, 2007; den Hertog et al., 2010) and the challenge for this discipline is to demonstrate significant difference from, or build upon, product innovation research (Drejer, 2004).
The last school of thought is referred to synthesis or integrative since it aims at building a unified theory for innovation, involving both product and process innovation (Gallouj and Savona, 2009). This school of thought believes that there is a convergence (Evangelista, 2006) between the typical elements of product innovation (e.g. tangible and standardization) and service innovation (e.g. intangible and less structured) since new forms of coordination and relationships between companies will be needed to facilitate this, representing the next step in the evolution of the economy (Gallouj and Savona, 2009).
Companies will need to adopt innovation from various suppliers active in their value network (Agarwal and Selen, 2009). All of the three schools of thought have their drawbacks and comparing services companies with manufacturing companies is appropriate to counterbalance them and enrich their insights to advance innovation research.
The non-technological elements of innovation are less studied in services research and hence this dissertation will contribute to the insights from these elements (Gallouj and Savona, 2009). The orientation of the dissertation is within the integrative (synthesis) discipline of service innovation research.
Services and products cannot be viewed as distinct features that can be offered by a service company (Normann, 2001; Vargo and Lusch, 2008b). They have
a common element, namely the exchange of something during a process which is beneficial for the other entity and done with that entity. This means that the tangible elements in a service are an integral part of the service that is offered. If products are present in a service offer, then they are a construct of applied knowledge making it a support to the service delivery itself (Vargo and Lusch, 2008b). A company has a set of resources (tangible or intangible) at its disposal (i.e. internally) or needs to look for those resources externally to realize its innovation activities, through a process (i.e. innovation process), and its degree of formalisation can be different. A further discussion regarding the assumptions, rationale and implications of this distinction, coupled with the evolution of an economy based on the exchange of goods towards one based on the exchange of services, can be found in the literature (Vargo and Lusch, 2006; Michel et al., 2008; Vargo and Lusch, 2008a; Lusch et al., 2010).
2.1.2 The innovation process
There has been substantial research on the innovation process itself, yet an archetypical process for its management could not be identified (Gupta et al., 2007). However it has become accepted that the degree of openness of the innovation process is paramount (Laursen and Salter, 2014; Van Beers and Zand, 2014), but this view came about through several evolutions. The conceptualisations of the innovation process as such can be described in five different generations over time (Rothwell, 1992; Rothwell, 1994).
The first generation (1950s - mid 1960s) viewed the innovation process as a linear sequence of activities that ultimately leads to an increase in sales through internal R&D activities. This model is referred to as “Technology Push” (Rothwell, 1992) because innovation is seen as something purely technological which had to be discovered and further developed. The first generation was especially focused on manufacturing new products and increasing production capacity because consumer demand was higher than the available offer from the producers. This model does not take into account the market being served, investing more in R&D was automatically expected to generate more revenues and growth since the market buys what is made available. The degree of openness in the first generation innovation process is therefore non-existent or marginally present.
The second generation (mid 1960s – mid 1970s) expands by starting to pay more attention to the market itself because production capacities were usually
